Tag Archives: Personal Finance

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Here’s what’s in the House’s $1.9 trillion American Rescue Plan

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In an effort to deliver financial relief to struggling families and ramp up vaccination distribution across the country, House Democrats passed the $1.9 trillion American Rescue Plan early Saturday morning.

The bill, which largely tracks the economic plan President Joe Biden unveiled in January, includes funding for vaccine production and distribution, another round of stimulus payments for many households, an extension of federal unemployment benefits and more. House Speaker Nancy Pelosi (D-Calif.) called it “transformative” during debate on the floor Friday night.

“The American people need to know that their government is there for them, and as President Biden has said, help is on the way,” Pelosi said.

No Republicans voted for the bill. Conservatives largely object to the bill’s size and the inclusion of provisions which they say are unrelated to the pandemic.

“Democrats are so embarrassed by all the non-covid waste in this bill that they are jamming it through in the dead of night,” said House GOP Leader Kevin McCarthy during the debate.

The bill will now head to the Senate, where it is expected to pass, albeit with some potential changes. Here’s the breakdown of some of the major provisions in the House’s version.

Child tax credit

In one of the more ambitious provisions, the bill institutes a fully refundable child tax credit for 2021, increasing the amount from $2,000 to $3,000 per child ages 6 to 17 and to $3,600 for children under the age of 6.

These payments begin to phase out for individuals earning more than $75,000 a year or married couples earning more than $150,000. 

Because they are fully refundable, eligible households would qualify for the credit no matter how little income they earn each year. Those households would receive a check from the IRS.

Housing assistance

The bill includes $30 billion in emergency rental assistance and an additional $5 billion to prevent Covid-19 outbreaks among homeless populations. Another $10 billion is earmarked for mortgage assistance. The bill does not directly extend the nationwide eviction moratorium, which is currently slated to expire at the end of March.

The stimulus bill passed in late December also included $25 billion in emergency rental relief.

Minimum wage increase

One of the most controversial provisions in the drafting of the bill, a minimum wage increase to $15 per hour by 2025, was included in the House’s bill — but it likely won’t make it into the final law.

The Senate parliamentarian, a nonpartisan official who decides which bills qualify to pass the upper chamber via reconciliation, determined Thursday that the minimum wage hike did not meet the standards legislation must meet so that it can be passed with a simple majority. Pelosi promised that Congress would address the minimum wage soon.

“The $7.25 minimum wage that exists now is in many instances an exploitation of the American worker,” Pelosi said. “And it is a cost to taxpayers because the minimum wage workers need food and housing assistance.”

Stimulus payments

The bill provides funding for a third economic impact payment, worth up to $1,400 per individual and dependent.

This time around, individuals earning an adjusted gross income (AGI) up to $75,000 (and married couples earning up to $150,000) will receive $1,400 each, plus $1,400 for each dependent. Unlike previous stimulus payments, adult dependents qualify for this round. That means many college students, disabled adults and elderly Americans will receive a check for the first time.

The payments phase out gradually, hitting $0 for individuals earning an AGI over $100,000 per year and couples earning over $200,000 per year. The payments are based on either 2019 or 2020 income, depending on when a taxpayer files their 2020 tax return.

Coupled with the $600 payments disbursed in January, this is meant to fulfill Biden’s promise of $2,000 stimulus payments. Some critics disagree that this fulfills the promise, arguing the federal government should send $2,000 payments in addition to January’s $600 check.

Unemployment insurance

The bill also extends key unemployment programs past their current March 14 expiration date through August 29. That is one month shorter than Biden proposed in his original plan.

In addition to extending benefits for gig workers and others who didn’t qualify for benefits before the pandemic, it also boosts the enhanced federal payments from an extra $300 per week to $400.

Vaccine distribution

The bill allocates $20 billion to create a national Covid-19 vaccination program, and an additional $50 billion for virus testing. The program is intended to help set up community vaccination sites across the country and eliminate vaccine shortages.

Finally, the American Rescue Plan also provides funding for schools, restaurants and bars, state and local aid, vaccine production and distribution and paid leave, among other provisions.

Now, the Senate will likely pass a different version of the bill. The House will then have to sign off on the new version. Democrats hope to have Biden sign the legislation by March 14, when many federal unemployment provisions expire.

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Business

This is how Social Security benefits are handled at death

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Urbazon | E+ | Getty Images

There is a lot to deal with when a loved one passes away.

On top of the emotional aspect of handling death, there is the financial stuff — which would include any Social Security benefits the deceased was receiving.

You may wonder how the government knows to stop sending that monthly money or whether a surviving spouse or dependent can keep some sort of payment going.

Social Security rules can be complicated. Yet the bottom line is that the decedent’s benefits stop at death. For survivors, how to get benefits — or whether you qualify — depends on several factors (more on that further below).

More from Personal Finance:
How spousal benefits work if you claim Social Security early
Here’s a decade-by-decade guide to retirement planning
Here’s when your tax return might be flagged by the IRS

First, though, it’s important for the Social Security Administration to be alerted as soon as possible after the person dies.

In most cases, funeral homes notify the government. There’s a form available that those businesses use to report the death.

“The person serving as executor [of the estate] or the surviving spouse can also call Social Security,” said certified financial planner Peggy Sherman, a lead advisor at Briaud Financial Advisors in College Station, Texas.

There are a couple of things to keep in mind. For starters, a person is due no Social Security benefits for the month of their death.

“Any benefit that’s paid after the month of the person’s death needs to be refunded,” Sherman said.

With Social Security, each payment received represents the previous month’s benefits. So if a person dies in January, the check for that month — which would be paid in February — would need to be returned if received. If the payment is made by direct deposit, the bank holding the account should be notified so it can return benefits sent after the person’s death.

It may be no surprise that using someone else’s benefits after they die is a federal crime, regardless of whether the death was reported or not. If the SSA receives notice that fraud might be happening, the allegation is reviewed and potentially will warrant a criminal investigation. To combat duplicity, the agency matches records with other government entities to identify unreported deaths.

As for benefits available to survivors: If a spouse or qualifying dependent already was receiving money based on the deceased’s record, the benefit will auto-convert to survivors benefits when the government gets notice of the death, Sherman said.

“For all other cases, the surviving spouse will need to call Social Security and schedule an appointment to apply for survivors benefits,” Sherman said. “You cannot do this online.”

If the widow or widower has reached their own full retirement age, they can get their deceased spouse’s full benefit, Sherman said. They can apply for reduced benefits as early as age 60, in contrast to the standard earliest claiming age of 62.

If the survivor qualifies for Social Security on their own record, they can switch to their own benefit anytime between ages 62 and 70 if that payment would be more.

An ex-spouse of the decedent also might be able to claim benefits, as long as they meet some specific qualifications.

For minor children of a person who died, benefits also may be available, as well as to a surviving spouse who is caring for the kids.

Finally, upon the death of a Social Security recipient, survivors are generally given a lump sum payment of $255.

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Biden extends protections for homeowners. What you need to know

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Historic row houses in Colombia Heights neighborhood of Washington DC, USA

amedved | iStock | Getty Images

Homeowners struggling amid the coronavirus pandemic received some welcome news on Tuesday, with the Biden administration announcing it will extend forbearance and foreclosure relief programs.

The White House said that the move will benefit the 2.7 million homeowners currently in Covid forbearance and extend the availability of forbearance options for around 11 million other government-backed mortgages nationwide.

“Since the crisis is going on much longer than anyone anticipated, it’s only appropriate to extend remedies that we know are working,” said Sarah Gerecke, an associate professor of planning at New York University. Many of those relief options were scheduled to expire next month.

Have questions about the new protections? Here are some answers.

Does my mortgage qualify for the new protections?

Federally backed mortgages, or about 70% of borrowers, are eligible for the additional forbearances.

If you have such a home loan, you can enroll in a forbearance until June 30, and potentially for six months after. If you have a mortgage from Fannie Mae or Freddie Mac, you can delay your payments for at least another three months.

“The easiest way to find out if you are eligible and to seek payment relief if you need it is to reach out to your lender,” said Greg McBride, chief financial analyst at Bankrate.com.

How do I request the forbearance?

Will I need to prove that I qualify for the forbearance?

Onerous paperwork requirements prevented many homeowners from getting relief during the 2008 crisis, McBride said.

Fortunately, during the pandemic, you only have to attest that you’ve suffered a financial hardship.

Do I have to do anything if I’m already in forbearance?

Yes. Your forbearance will not automatically renew.

“You must contact your lender and ask for it,” McBride said.

How long can I be in forbearance for?

Some people will be in forbearance for as long as 18 months, since the first stimulus package passed in March, the CARES Act, offered homeowners two 180-day relief periods, and now the Biden administration is granting them two additional three-month breaks.

How will my missed payments be calculated?

Fortunately, if you qualify for the forbearance, you don’t need to make up your payments in a lump sum at the end of the relief period. (Although if you’re one of the 30% of homeowners who don’t have a government-backed or guaranteed mortgage, you might.)

Instead, you can ask that your payments be tacked on to the end of your loan, McBride said.

For example, if you missed 12 months of payments, a 30-year mortgage would now take you 31 years to pay off.

What if I’m at risk of foreclosure?

You should be safe until at least the end of June.

“You will not be foreclosed on during the period of the moratorium unless you have vacated or abandoned your property,” said Sara Singhas, director of loan administration at the Mortgage Bankers Association.

I’m a renter. Does this offer me any protections?

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Business

Beware this tax pitfall if you had unemployment income during Covid

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The 2020 tax season is officially underway, and the millions of Americans who collected unemployment benefits last year due to the coronavirus pandemic may be in for a surprise.

That unemployment income is taxable, and if you didn’t have money set aside or withheld for those taxes, it could reduce your refund or even lead to a bill.

This might be particularly unexpected for independent contractors and self-employed people who normally aren’t eligible for state benefits but may have received Pandemic Unemployment Assistance through the CARES Act.

“There are going to be a lot of people this year that have unemployment insurance and they do not normally receive unemployment insurance benefits,” said Elaine Maag, a principal research associate at the Urban-Brookings Tax Policy Center. “So it will be something new that they have to pay attention to.”

Differences in state and federal treatment

If you had any unemployment income last year, it is subject to taxes and needs to be reported on your 2020 income tax return. In January, those who had unemployment income should have received a Form 1099-G that spells out the amount of money paid out during the year.

Federal income taxes apply to these benefits — whether it’s state unemployment insurance or the pandemic unemployment compensation disbursed under the CARES Act.

The catch is that withholding the appropriate amount of income tax is voluntary. You can opt to have a flat 10% of your benefits withheld to cover the tax liability.

In order to do this, you’d have to file Form W-V4 with the state agency administering your unemployment.

You can also choose to make quarterly estimated tax payments to the IRS.

Uncle Sam isn’t the only entity seeking a slice of your unemployment income. Most states will tax these benefits, too.

A handful of states — Alabama, California, Montana, New Jersey, Pennsylvania and Virginia — don’t tax these payments. Indiana and Wisconsin offer a partial exclusion of unemployment income, according to Andy Phillips, director at the Tax Institute at H&R Block.

“Some states have withholding, and others require it in order to alleviate surprises when tax time comes around,” said Jared Walczak, vice president of state projects at the Tax Foundation.

Though it’s too late to head off the taxes you might owe for 2020, individuals who wrap up their returns early can at least plan to pay the amount owed by April 15 — the due date for tax returns and liabilities owed.

“You don’t have to make a payment until April 15, but it’s better to know in late January or early February that you have to come up with the dollar amount by then,” said Phillips at the Tax Institute at H&R Block.

Unemployment and tax credits

Families who received unemployment income during 2020 should also be on the lookout for two key credits as they file their taxes: the earned income tax credit and the child tax credit.

Both credits add up to significant dollars — the earned income tax credit is worth up to $6,600 for a low-income household with three or more qualifying kids. And, the refundable portion of the child tax credit is worth up to $1,400 per qualifying child.

More from Smart Tax Planning:
Crypto falls in value. What it means for taxes
State tax departments set their sights on pro athletes
People fled from these high-tax states in 2020

The catch? While unemployment benefits are taxable, they aren’t considered earned income.

Under normal circumstances, receiving unemployment would result in a reduction of both credits when you file your tax return.

Lawmakers fixed this problem in the year-end Covid relief act. This year, when you file your 2020 taxes, you’ll have the option of using your 2019 income to calculate eligibility for the credit.

“If you went from being a wage earner to applying for unemployment, you can be affected,” said Phillips. “Using your 2019 earned income just for figuring the amount of credits can be a huge benefit for taxpayers.”

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Business

GameStop Investors Who Bet Big—and Lost Big

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Salvador Vergara was so enthusiastic about

GameStop Corp.

GME 2.54%

in late January that he took out a $20,000 personal loan and used it to purchase shares. Then the buzzy stock plunged nearly 80%.

GameStop’s volatile ride is hitting the portfolios of individual investors like Mr. Vergara who purchased the stock in a social-media-fueled frenzy. These casual traders say GameStop was their “YOLO,” or “you only live once,” trade. They bought around its late January peak, betting it would continue its astronomical climb. While some cashed out before it crashed, others who hung onto their shares are in the red.

‘I thought it could go up to $1,000. I really believed in that hype, which was an awful thing to do,’ Mr. Vergara says.



Photo:

Farrah Skeiky for the Wall Street Journal

Mr. Vergara, a 25-year-old security guard in Virginia, started investing four years ago after deciding he wanted to retire young. To save money, he drives a 1998 Honda Civic, eats a lot of rice and lives with his dad. He stashed his savings mostly in diversified index funds, which are now valued at about $50,000. Then Mr. Vergara, a longtime reader of the WallStreetBets page on Reddit, saw others posting about buying GameStop shares and the stock’s colossal rise.

He didn’t want to touch his index-fund investments, so instead he got a personal loan with an 11.19% interest rate from a credit union and used it to fund most of his GameStop purchase. He bought shares at $234 each.

Price return, year to date, 30-minute intervals

Source: FactSet

GameStop shares started the year around $19, zoomed to nearly $350 (and almost hit $500 in intraday trading) in late January, and then began to spiral back to earth. The shares closed Friday at $52.40, down 85% from the peak close.

“I thought it could go up to $1,000. I really believed in that hype, which was an awful thing to do,” Mr. Vergara said.

He plans to hold on to the shares because he believes in the company’s turnaround, he said, and use his paycheck to cover the monthly payments on the personal loan. Once the pandemic is over, he hopes to move back to his native Philippines, live off savings and start a charity. The GameStop loss set those plans back about six months, he said.

One of the artworks by Tony Moy, whose bet on GameStop stock has lost much of its value, is inspired by ‘diamond hands,’ a phrase used to describe hanging onto your position, no matter what.



Photo:

Matt Moy

Free trading and simple-to-use apps have made it much easier for regular investors to pour money into stocks like GameStop. In a world without international travel, live entertainment and other usual pastimes, brokerage apps such as Robinhood Markets Inc. are drawing hordes of new users looking for both a diversion and a jackpot.

Before the pandemic, Patrick Wesolowski checked his portfolio once a week. Then the clients of his Chicago-area dog-walking business stopped taking vacations and started working from home, crimping his income and leaving him with lots of free time.

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With business sluggish, the 31-year-old started spending more time researching stocks to include in his $15,000 portfolio. He “lurked” on WallStreetBets, reading about other investors’ wild bets but not posting much himself. “It’s like reading ‘Florida Man’ news headlines with a Wall Street twist,” he said.

In recent months, Mr. Wesolowski found himself picking up his smartphone to check his Fidelity Investments brokerage-account balance more often. He followed the frenzy around GameStop, and when shares were approaching $300 decided to put in $3,000. Afterward, he checked his portfolio on his phone every 10 minutes. At first, watching the stock drop made him feel queasy, but then he got used to it.

“If I lose it, I lose it. I’m OK. It’s like going to Vegas,” Mr. Wesolowski said. If he still had that money, he said, he might have put it toward a personal splurge like a vacation.

Patrick Wesolowski spent more time researching stocks after the pandemic hurt his dog-walking business and bought $3,000 of GameStop shares.



Photo:

Ola Wazny

For many, GameStop represented more than just an investment. When Tony Moy bought about $1,200 of the shares, two at $379 and two more a few days later at $228, “I knew it was, intrinsically, the wrong move,” he said.

Mr. Moy wasn’t surprised when the stock quickly lost much of its value. A casual reader of WallStreetBets, he was mostly excited about the push to stick hedge funds with losses. Some hedge funds that shorted the stock—betting the price would fall—suffered big losses, though others managed to make money during the turmoil.

The trade was an outlet for Mr. Moy’s frustrations after an abysmal year, a “virtual protest” of sorts, he said. In 2020, after the pandemic shut down large gatherings, the Chicago-based artist lost most of his income from selling his work at comic conventions. He also came down with a bad case of Covid-19 that left him coughing for months. He said his more successful investing endeavors have helped him get by financially.

One of Mr. Moy’s most recent works of art is inspired by “diamond hands,” a phrase used on Reddit to describe hanging onto your position, no matter what. He is keeping his GameStop shares as a memento. “It’s going to be a little reminder to me,” he said, “of how 2020 was the year when hedge funds had a great year and everyone else was struggling.”

The recent run-up in GameStop and other stocks involved investors in opposing camps: traditional Wall Street firms and small investors bucking the system. WSJ asked the same questions to one of each about the role of WallStreetBets in the trading frenzy. Photo Illustration: Carlos Waters

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

How you can retire at 50 by investing in the stock market

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Many Americans aren’t doing the math on their retirement.

More than 75% of people planning to retire haven’t calculated how much money they will need before taking the leap, according to the 2020 Four Pillars of the New Retirement study by investment company Edward Jones.

Luckily, CNBC crunched the numbers, and we can tell you how much you need to save to get $50,000 of passive income every year in retirement. 

First, some ground rules. The numbers assume you will retire at 50, have no money in savings now and plan to put away a substantial amount of your income to reach your goal. 

For investing, we assume an annual 4% return when you are saving. We do not factor in inflation, taxes or any additional income you may get from Social Security and your 401(k).

In retirement, we use the “4% rule,” which is a general principle that says you can comfortably withdraw 4% of your portfolio every year. 

It is important to note that with the recent market volatility, there is a risk you’ll have to lower your spending percentage in the future.

Check out this video to get a full breakdown of the numbers.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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Business

Unemployment fraud may create a nightmare for taxpayers

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Stefani Reynolds/Bloomberg via Getty Images

Millions of Americans will get tax forms for unemployment benefits this filing season. However, many will get them in error due to fraud, creating a potential headache for recipients.

At least $36 billion has been lost to improper unemployment payments, largely due to fraud, by early November, according to an estimate from the Office of the Inspector General for the Department of Labor.

That sum may ultimately balloon to more than $63 billion, the watchdog said last week.

Identity theft has been among the most common frauds, according to security experts. Scammers file fraudulent unemployment claims using the stolen personal data of individuals who didn’t file.

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The scammer gets the unemployment income but the identity victim gets the associated 1099-G tax form. The federal government treats unemployment benefits as taxable income. (Some states don’t tax benefits, however.)

Scammers were drawn to a relatively high payout per person, especially in the spring and summer when the federal government paid an extra $600 a week. The Pandemic Unemployment Assistance program was frequently targeted since it allowed recipients to self-attest they’d lost a job.

“This is a critical issue that is plaguing labor departments across the United States involving local, state, and even international criminals at times,” Mark Butler, Georgia’s labor commissioner, said of unemployment fraud.

What to do?

Individuals who receive a 1099-G form but didn’t collect benefits should first reach out to the state unemployment agency for a corrected form, according to the IRS. This revised 1099-G would show that the taxpayer hadn’t collected any money.

Some fear it may be difficult to get through to state agencies, which have been plagued by delays during the pandemic amid historic volume.

States may have different instructions or outlets to report identity fraud. California, for example, set up a phone hotline designated for Form 1099-G questions and increased call-center staff.

Taxpayers unable to get a corrected form by the time they file their taxes should still file an accurate return, according to the IRS. In other words, they should only report the income they received and not the unemployment benefits reported on the 1099-G.

But they should consider explaining in a footnote to their tax return that they received a 1099-G in error, said Michael D’Addio, a principal at the accounting firm Marcum who’s based in New Haven, Connecticut.

Taxpayers should also continue to request a corrected tax form even after filing, he said. Otherwise, the IRS may not have updated information at hand and may inquire about a discrepancy.

“At the end of the day, it’s very difficult to get the IRS to agree an item isn’t taxable when they have a form saying it’s taxable income,” D’Addio said. “You tend to want to get that corrected form from the state.”

The IRS issued guidance to states in late December notifying them not to send 1099-Gs to individuals deemed to have been identity fraud victims, which should reduce the number of affected individuals.

Other information

Taxpayers don’t need to file an Identity Theft Affidavit with the IRS for an incorrect 1099-G, according to the agency. These affidavits are only required if the taxpayer’s e-filed return is rejected because a return using the same Social Security number already has been filed, according to the IRS.

Those who are concerned their personal information has been stolen and want to protect their identity when filing their federal tax return can request an Identity Protection PIN from the agency. The PIN prevents someone else from filing a return with the taxpayer’s Social Security number.

There are other measures potential identity-theft victims are encouraged to take, per the Georgia Department of Labor. They include:

  • Filing a police report and keeping a copy to show to creditors and credit agencies;
  • Changing passwords on e-mail, bank and other personal accounts;
  • Asking credit-card companies, banks and other financial institutions to put a fraud alert on your account;
  • Getting a copy of your credit report and flag any fraudulent transactions with any of the three major credit reporting companies (Equifax, TransUnion or Experian). You may also place a fraud alert on your credit file and consider freezing your credit.

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Business

What the GameStop craziness could mean for the stock market’s future

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Tiffany Hagler-Geard | Bloomberg | Getty Images

The stock market is known for being unpredictable and volatile, and any sense of normalcy was blown up during the recent GameStop rally.

Most of us know the story by now: After discovering that several hedge funds had bet on the video game retailer losing value, people banded together on the Reddit forum WallStreetBets to drive up its share price by 1,500%. Over the course of January, GameStop’s stock price ballooned to a high of $483 from a low of $17.

The bubble already appears to be popping, with GameStop shares down to around $55 as of Friday.

Still, the event is unlikely to be soon forgotten, experts say.

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The Reddit forum of retail investors vowing to take on Wall Street still has more than 8.5 million subscribers (or as they call themselves, “degenerates”). And Netflix is already in talks to make a film dramatizing the battle royale between giant hedge funds and a pack of individual day traders.

What’s more, experts say the event tells us about what’s bringing people into the market these days — and what that could mean for investing in the future.

More bubbles

In many ways, the GameStop rally resembles bubbles of the past, but it has some unique characteristics, too, experts say.

“What is new is the scale and speed of the event,” said Veljko Fotak, associate professor of finance at the University at Buffalo.

The ubiquity of smartphones on which people can download investing apps, the availability of cheap or free trading and “a pandemic with a lot of restless energy,” are all factors that contributed to the video game retailer’s rally, said Dan Egan, vice president of finance and investing at Betterment.

Populism spreading across the globe is yet another factor that fueled the bubble, Fotak said. “Some investors were motivated not just by pure greed, but also by a desire to ‘stick it to the man,'” he said.

Many people are also brought into the market these days when they see friends or people they follow on social media touting certain stocks, said David Sekera, chief U.S. market strategist at Morningstar. Some of these posts are very convincing: Users on Reddit, for example, were exchanging high-level analysis on GameStop’s finances.

“The days that equity research was limited to the large, bulge bracket Wall Street firms is long past,” Sekera said.

All of these events that propelled the GameStop bubble could spur many more.

“I do think that, to some degree, this herd Reddit movement is going to continue,” said Jason Reed, a finance professor at the University of Notre Dame. “We’ve already begun to see the movement into other equities and assets, like AMC, Blackberry and silver gaining considerable momentum.”

As shares of GameStop tumbled on Feb. 2, many Reddit users claimed to be holding onto their stock or even buying more, writing that it wasn’t a loss until they sold out.

Source: Reddit

More people investing is positive, but only if they’re doing so wisely, experts say.

Those who buy stocks based off posts on social media, for example, are often taking risks with money they can’t afford to lose, Egan said.

“One of the biggest concerns is newer investors seeing a ‘hot’ stock, but not fully understanding the ramifications of investing in it,” he said. “A lot of retail investors could lose their shirt.”

Fotak said he read of one recent law school graduate who said he was elated by his wins on GameStop.

“He could now afford to pay off his student loans,” Fotak said. “Yes, there is a lot of greed at play here.

“But there is also a lot of desperation,” he added. “I really, truly, hope he sold right away.”

Less shorting?

Hedge funds that had shorted GameStop suffered huge losses as the pack of day traders on Reddit bought the stock en masse, shooting up its price. Melvin Capital, for example, lost more than 50% in January.

Those setbacks could make other investors more skittish about shorting, or betting against stocks, experts say.

“After seeing several other funds get carried off the field on stretchers from these short positions, hedge fund managers will be much more cautious as to which stocks they will be willing to short,” Sekera said.

Less shorting means a less healthy market, Fotak said.

Bubbles tend to be less common in countries where short sellers are less restricted, he said. That’s because short sellers’ pessimism can balance out some of the optimism about a certain sector or stock.

“And in this climate, with market valuations at record levels, we need the contrarian views of short sellers more than ever,” Fotak added.

Another advantage of short sellers is that they often expose serious problems at companies that other investors and regulators have missed, Fotak said.

“Since they are looking for firms that are overvalued, they are always on the lookout for fraud,” he said, adding they often publish research on companies’ bad practices.

And so it’s unfortunate that the GameStop debacle may curb shorting, Fotak said.

“To the extent that delays the release of negative information, we all suffer from a less efficient market,” he said.

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Business

GameStop Day Traders Are Moving Into SPACs

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Special-purpose acquisition companies—shell companies planning to merge with private firms to take them public—are rising more than 6% on average on their first day of trading in 2021, up from last year’s figure of 1.6%, according to University of Florida finance professor

Jay Ritter.

Before 2020, trading in SPACs was muted when they made their debut on public markets.

Now, shares of blank-check companies almost always go up. The last 140 SPACs to go public have either logged gains or ended flat on their opening day of trading, per a Dow Jones Market Data analysis of trading in blank-check companies through Thursday. One hundred and seventeen in a row have risen in their first week. The gains tend to continue, on average generating bigger returns going out to a few months.

The gains in companies that don’t yet have any underlying business underscore the wave of speculation in today’s markets. Merging with a SPAC has become a popular way for startups in buzzy sectors to go public and take advantage of investor enthusiasm for futuristic themes.

But lately, day traders are even putting money into SPACs before they have revealed what company they are buying. At that stage, they are pools of cash, so investors are wagering that the company will eventually complete an attractive deal.

Despite the risks, many are embracing the trade, underscoring how online investing platforms and social-media groups now send individuals flocking to new corners of markets, including shares of unprofitable companies such as GameStop and

AMC Entertainment Holdings Inc.

AMC 53.65%

That trend also is playing out in everything from shares of silver miners to SPACs, which were relatively rare before last year but are suddenly ubiquitous in finance.

“I would just have a bad case of FOMO if I wasn’t in SPACs,” said

Marco Prieto,

a 23-year-old real-estate agent living in Tucson, Ariz., referring to the fear of missing out that is driving many individuals to put money into markets.

He has a roughly $50,000 portfolio and about 60% of his holdings tied to blank-check companies. Some of his positions are early on in shell firms such as

Social Capital Hedosophia Holdings Corp. VI,

while others are based on rumors tied to possible deals by companies including

Churchill Capital Corp. IV.

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Share-price performance of existing SPACs without deals announced*

Amount of cash

held by SPAC:

Biotechnology/Life science/Health care

Shares of that company have more than doubled since Bloomberg News reported on Jan. 11 that it is in talks to combine with electric-car firm Lucid Motors Inc. Trading got so frenzied that the SPAC put out a statement a week later saying it wouldn’t comment on the report and that it is always evaluating a number of possible deals. The stock has still been gyrating in the days since.

Investors betting on SPACs even before such reports is extraordinary because the underlying value of a blank-check firm before it pursues a deal is the amount of money it raises for a public listing. That figure is typically pegged at $10 a share. Still, it has become common for investors to buy at higher prices such as $11 or $12 to back big-name SPAC founders such as venture capitalist

Chamath Palihapitiya

and former Citigroup Inc. deal maker

Michael Klein.

In another sign blank-check firms are now frequently traded by individuals, several SPACs and companies that have merged with them recently joined GameStop and AMC on a list of stocks that had position limits on Robinhood Markets Inc., a popular brokerage for day traders. Those restricted included Mr. Klein’s Churchill Capital IV and a few of Mr. Palihapitiya’s SPACs in the

Social Capital Hedosophia

SPCE 2.74%

franchise.

The flood of money pouring in is a concern for skeptics who worry that everyday investors don’t understand the dangers of the trade. Even recent losses in a few hot companies such as electric-truck startup

Nikola Corp.

NKLA -0.39%

and health-care firm MultiPlan Inc. that merged with blank-check firms aren’t deterring investors because of the gains in other SPACs.

“It’s a tremendous amount of speculation,” said

Matt Simpson,

managing partner at Wealthspring Capital and a SPAC investor. His firm invests when SPACs go public or right after, then takes advantage when shares rise and typically sells before a deal is completed. He advertised an expected return from the strategy of 6% to clients, but last year it returned 20%.

Ninety-one SPACs have raised $25 billion so far this year, putting the market on track to shatter last year’s record of more than $80 billion, according to data provider SPAC Research.

Fast gains in the shares can result in big payoffs for their founders and the first investors in blank-check firms like Mr. Simpson. These earliest investors always have the right to withdraw their money before a deal goes through. The traders who get in later don’t have those same privileges, but that hasn’t been a deterring factor.

“If you don’t take a risk, there’s really no opportunity at all,” said

Chris Copeland,

a 36-year-old in upstate New York who started day trading on the platform Robinhood with his girlfriend last month. Roughly three-quarters of his portfolio is tied to SPACs such as

GS Acquisition Holdings Corp. II.

Mr. Prieto checks SPACs on his phone. ‘I would just have a bad case of FOMO if I wasn’t in SPACs,’ he says.



Photo:

Cassidy Araiza for The Wall Street Journal

Trading volumes in many popular blank-check firms have increased lately, an indication of investors’ heightened activity. That trend is even drawing attention from some SPAC founders.

“It worries me,” said veteran investor and SPAC creator

Bill Foley.

Trading volumes have surged in one of the SPACs founded by the owner of the Vegas Golden Knights hockey team, especially since it announced a $7.3 billion deal to take

Blackstone Group Inc.

BX 0.21%

-backed benefits provider Alight Solutions public last week.

One reason traders are getting into blank-check firms when they are just pools of cash is that the time it takes for a SPAC to unveil a deal has dwindled. Blank-check firms normally give themselves two years to acquire a private company, but many these days need only a few months.

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It also doesn’t take long for investor speculation about a blank-check firm’s acquisition to build, particularly because SPACs can indicate the sector in which they hope to complete a deal.

Excitement can be triggered by a SPAC pioneer like Mr. Palihapitiya, who sometimes hints to his more than 1.2 million Twitter followers when activity is coming. The former Facebook Inc. executive took space-tourism firm

Virgin Galactic Holdings Inc.

public in 2019 and last month reached a deal with Social Finance Inc.

Even though he invests in a number of blank-check firms other than his own—often when SPACs need to raise more money to complete deals—shares of his own companies can climb following such tweets. One example came Jan. 21, when one of his blank-check firms rose about 4% after Mr. Palihapitiya started a tweet by saying “I’m finalizing an investment in ‘???.’”

The SPAC has since given back those gains after no news about an acquisition came out and it was revealed that Mr. Palihapitiya’s investments were in companies unrelated to his own. He declined to comment.

Mr. Palihapitiya also has thrown himself into the frenzy of activity around GameStop trading, publicizing an options trade last week in the stock and taking profits on it.

Reports about possible mergers like those surrounding the Churchill Capital IV SPAC and a possible combination with Lucid Motors also quickly attract hordes of buyers. That blank-check firm is now owned by many individuals, including Messrs. Prieto, Copeland and

Jack Oundjian,

a 40-year-old who lives in Montreal.

“I’m very excited that we have a chance to be able to participate in what could be future unicorn companies,” or startups valued at $1 billion or more, Mr. Oundjian said. He said he views SPACs as long-term investments rather than fast trades, and holdings tied to the sector make up about 30% of his roughly $1.2 million portfolio.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

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